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Asset Growth for 529 Plans Means Improved Scale, Lower Fees

Asset Growth for 529 Plans Means Improved Scale, Lower Fees

Leo Acheson: Assets within 529 college savings plans continue to increase. At the end of 2016, 529 plans reached a record high of $248 billion in assets. That represents a year-over-year growth rate of 9%. Direct-sold plans continue to take market share from advisor-sold plans due to a combination of factors, including lower fees and increasingly user-friendly websites. Direct-sold plans now represent 55% of the industry.

This growth in assets has improved scale and helped drive fees lower in 2016. The average expense ratio for all 529 investments decreased by 3 basis points during 2016 to 1.05%. On an asset-weighted basis, the trend was similar, with the asset-weighted average fee falling by 4 basis points to 0.70%. That figure is 35 basis points below the simple average, demonstrating that investors have heavily favored cheaper options.

Another trend in the 529 landscape is smoother glide paths within age-based portfolios. Age-based portfolios gradually reduce equities in favor of fixed income as the beneficiary ages. These options follow either stepped or smoothed approaches as they rebalance along the glide path. The stepped approach makes abrupt shifts from stocks to bonds at predetermined dates. Meanwhile, a smooth glide path uses smaller, more-frequent asset allocation adjustments. We favor the smoother method, or a stepped approach that uses moderate steps. The stepped approach can introduce meaningful market risk if it makes a large asset-allocation change in one day, but our research has indicated that steps of roughly 10% or less largely mitigate this risk.

Overall we see these as positive trends that will likely lead to better outcomes for college savers.

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Leo Acheson

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Leo Acheson, CFA, is director, multi-asset ratings, global manager research for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc.

He oversees Morningstar’s multi-asset ratings as well as the firm’s multi-asset and alternatives manager research team. The group covers a range of investment vehicles, including allocation strategies, alternatives, target-date funds, 529 plans, HSAs, model portfolios, and Mexican pension funds.

Before joining Morningstar in 2013, Acheson spent four years working for a Chicago-based investment consultant, conducting mutual fund and asset-class research to help corporations manage their investment programs.

Acheson holds a bachelor’s degree in finance and accounting from Indiana University’s Kelley School of Business. He also holds the Chartered Financial Analyst® designation.

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